Income tax: A lot of trouble for just 10p

The possibility of a starting tax rate of 10p has excited Chancellor Gordon Brown and his close friends ever since Labour was elected nearly two years ago.

It is a measure, he said at last year's Budget, that will be brought in 'when it is prudent to do so'.

There has been a good deal of expectation that 1999 is the year when it will be unveiled to the public. The benefits of the tax change will not filter through to pay packets until next year, in time for the next election. Also the public finances can count on a pounds 5 billion surplus this year, but probably not next year or the year after.

If he does take the wrapper off his Big Idea, he will be complicating the tax system further and will meet a volley of criticism that his target audience - low earners - will not be the main beneficiaries.

Tax experts reckon the 10p tax band will apply to the first pounds 1,000 of income before the 20p tax band takes over, soon followed by the 23p band and the 40p band bringing up the rear at roughly pounds 31,000.

Anyone wanting to work out their tax bill under self-assessment will have even more fun than usual.

Critics argue that raising personal allowances would benefit more people on lower incomes and the 10p rate is a gimmick.

Firstly, anyone who is going to benefit must be a taxpayer and to get the full benefit they must have earned enough money to pay the full tax. An increase in allowances would keep the number of tax bands to three and increase the amount of tax free income for everyone on a low income.

With three weeks to go until the Budget, City analysts said January's whopping pounds 12.4 billion surplus meant that the Chancellor had scope to spend 'several billion pounds' and still meet his tough fiscal rules.

But the Treasury played down hopes of a giveaway budget by saying too much should not be read into one month's figures. It is understood that the statistics are unlikely to lead to significant changes in Mr Brown's fiscal projections for the current financial year despite speculation in the City of favourable revisions.

In the pre-Budget report in November, the Chancellor forecast the public sector net cash requirement would be in surplus by pounds 4.3 billion in 1998-1999. With less than two months to go before the end of the tax year, the public finances are already in the black by pounds 13.7 billion. This suggests the Treasury expects a significant deterioration in the state's coffers between now and April.

Thereafter, public finances are likely to come under pressure as unemployment rises and tax receipts fall in response to slowing growth.

Michael Saunders, UK economist at the US investment bank Salomon Smith Barney Citibank, said: 'If the growth of net outlays stays at 2.1 per cent year-on-year, then spending over the full fiscal year will undershoot the Treasury's forecast by about pounds 7 billion. In practice, some catch-up is likely in the last two months, but spending would need to rise by about 17 per cent year-on-year in the last couple of months in order to avoid an underspend.' Jonathan Loynes of HSBC said January's data increased Mr Brown's room for manoeuvre. 'Such a favourable starting position means that Mr Brown could conceivably spend several billion pounds in the March budget and yet still forecast that he will meet his fiscal rules with plenty of room to spare.

'It even opens up the possibility of bringing in the promised 10p starting rate of income tax on a meaningful income band without having to threaten the Middle England vote by further cutting mortgage interest relief and the married couples' allowance.' Yesterday's Office for National Statistics data offered a foretaste with a slight fall in central government revenues. January's corporation tax receipts were down 19 per cent year-on-year to pounds 5,856 million, whereas they rose by 6.3 per cent in the April to December period.

Income tax receipts were also only marginally higher at pounds 12,461 million, in contrast to a 17 per cent gain in the previous nine months. As a result, analysts said, tax receipts were no longer overshooting and were likely to end the year up by around the amount predicted by Mr Brown.

Spending remained weak, however, with government outlays falling by 5.6 per cent year-on-year. In the year to date, net outlays are up by only 2.1 per cent, whereas the Treasury is expecting them to rise by close to 5 per cent.